For weeks, Wall Street has been saying that it was convinced there would be a deal on the debt ceiling in Washington and wasn’t at all concerned about the possibility that nothing would get done by the August 2 deadline. There would be a deal, it said, because in the end there’s always a deal and everything that we were seeing inside the beltway was nothing more than political theater. As a result, the common assumption was that the prospect for a deal was already priced in to the markets.
Except that we now know for sure that it wasn’t.
In response to the news yesterday that the gang of six had finally agreed to a comprehensive deficit reduction plan and the preliminary signal from the White House that the deal could provide the way to avoid a debt ceiling crisis, there was a clear relief rally in both the stock and bond markets. The timing of the rallies was unmistakably associated with the gang of six announcement, and the analysis made it clear that traders were responding to what it considered positive news that was different from what it was expecting.
In other words, the market analysts who have been saying for months that the debt ceiling fight was having no impact on stock prices and interest rates either didn’t have a clue or were lying. The relief rallies that took place yesterday immediately after the the gang of six plan went public shows that (1) Wall Street was/is indeed very concerned, (2) interest rates absolutely have been higher than they otherwise would have been because of the debt ceiling fight, and (3) completely contrary to what we’ve been told, interest rates and stock prices will be substantially affected if the debt ceiling isn’t raised by August 2.
It also shows that Wall Street is far more concerned that a deal won’t be reached than it has been willing to admit.